2015 Whole Life Insurance Dividend Analysis

In 2013 we released the industry’s first public analysis on variation in dividends for major participating whole life insurance products. This analysis focuses on variation and trend of declared dividend interest rate at the seven most competitive life insurers who issue participating whole life and will publicly announce/disclose their dividend interest rate (more on this point later on).

We’ve long argued that this sort of analysis is the best gauge of potential cash value performance in a whole life policy because it allows us to review how the company has managed business and investment operations given the axiomatic assumption that these life insurers will move heaven and earth to deliver the highest dividend award to participating policyholders. This foundational assumption has substantiating legal precedents.

Comparing Dividend Interest Rate among Carriers, A Foolish Mistake

Both laymen and some industry professionals make the cringeworthy misstep of comparing the dividend interest rate of one company to another. Since there is no exact standard to dividend interest rate reporting (i.e. is it gross or net?) and since the basis off which the insurers pays this rate is proprietary information unique to the individual policy such a comparison is useless in the pursuit of making any discernible conclusion about the how good or bad one rate is.

Also egregious is the tendency to use multi-year average dividend interest rates compared across insurers as if this means anything à la the insinuation that a company with a higher average dividend interest rate over the course of several decades must be better than one with a lower rate for the same time period.

Variation: a better Measure

We can’t compare the specific dividend interest rates across life insurers, but we can compare how they move over time. We do this by measuring the year over year movement of the dividend interest rate over a certain period of time and compare the variation results. Our favored time period is 10 years because it’s a large enough sample size of give us adequate data, but not so long a time span to be seriously outdated (though by the 10th year we’re certainly pushing relevancy a bit).

The Approach

We calculate the standard deviation of declared dividend interest rates over the 10 year sample period and compare is across several life insurers to see how has varied the most and least. Lower standard deviation indicates an insurer that has been more consistent with dividend payments, but we should note that this measure could lead us astray if an insurer were to achieve significant operational and investment performance allowing it to dramatically increase the dividend interest rate over the sample period. To control this possible problem we also calculate the 10 year compound annual growth rate for the dividend interest rate.

Doing this allows us to determine if a high standard deviation is a good or bad thing. In the case of a flat or positive compound annual growth rate, a high standard deviation is likely a good thing. If the compound annual growth rate is negative, this is bad news.

The Results

The results are found in these tables:

Standard Deviation

10 Year Compound Annual Growth Rate

The average standard deviation was 0.38%. One company did considerably better Penn Mutual and one considerably worse Northwestern Mutual.

The average compound annual growth rate was -1.15% and again Penn Mutual did considerably better with Northwestern Mutual doing considerably worse. These results are very similar to the analysis the last time we did it.

Some insurers improved while others have not. Notably Northwestern Mutual remains the laggard of the group with the highest degree of deviation and the most negative growth in dividend interest rate over the last 10 year period with MetLife also substantially lagging. Ohio National achieved the greatest improvement with a reduction in deviation and improved 10 year growth vs. two years ago. Penn Mutual continues its impressive run with the lowest deviation, but a strong drop in 10 year growth vs. two years ago, the company still remains the only insurer with a 10 year positive growth rate.

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.